Determinants of Capital Formation and Agriculture Growth

This paper estimates a simultaneous equation model using private and public sector capital formation and GDP agriculture as independent variables to find out the determinants of capital formation and their impact on GDP agriculture. The rate of return on private investments, which in turn depends on the terms of trade and technology, is found to be the most important determinant of private capital formation. There is an asymmetry in the effect of public investment on private investment: an increase in public investment definitely induces a rise in private investment, while a decline forces farmers to cope with its adverse impact, again by increasing private investment.